From garage to unicorn – Employment law lessons for scaling tech teams

To scale up successfully will necessarily involve increasing headcount. It is crucial for tech companies to understand the challenges that come with a growing workforce. From hiring practices to contract structuring and managing flexible workforces, this article discusses the key employment law lessons for scaling tech teams.

Hiring fast does not mean hiring loose

In the rush to scale, many tech companies prioritise speed over structure. However, employment law is protective by design, and even in the earliest stages, employees must receive written terms of employment providing specific details on or before their first day of employment.

Relying on generic templates or verbal agreements can lead to ambiguity and risk. An employment contract for a junior member of staff, for example, would not be appropriate for a project manager or a director-level hire.

Employment contracts should reflect the reality and understanding of the parties to minimise the risk of disputes. Contracts should, for example, include:

• Clear job descriptions and reporting lines.
• Defined probation periods (with a mechanism to extend them if necessary)
• Notice terms (i.e. how much notice either party should give to terminate employment, both during any probation period and thereafter).
• Pay and benefits, including pension provision
• Intellectual property and confidentiality clauses.
• Reasonable post-termination restrictions (for example, non-competition provisions and provisions preventing the solicitation of clients or key staff members).
• IP ownership.
• Remote working (if this is permitted and, if so, the terms on which it is).
• Equity arrangements (if any).

Separately, tech companies should keep in mind other factors that are not always obvious or immediately thought about when hiring staff.  For example, ensuring fair recruitment practices which are not discriminatory (including offering reasonable adjustments for disabled applicants) and handling the personal data of job applicants and employees lawfully in line with data protection law.    

The cost of misclassification

Tech companies often rely on contractors and freelancers. However, classifying workers as self-employed when they function as workers or employees can result in tax penalties and significant employment tribunal claims.

Determining employment status is a complex area of employment law.  Individuals can work as self-employed, as a worker or as an employee.  Employees enjoy the most protection under employment law and self-employed individuals the least. Workers are in between the two in that they do not have protection from unfair dismissal, for example, but do have certain other rights, such as the right to paid annual leave, rest breaks and the right to receive the national minimum wage.  

In the UK, employment law does not just look at what is written in a contract when determining an individual’s employment status – it examines the reality of the working relationship. For example, if a contractor works regular hours, uses your equipment or email domain, or reports to a manager and follows internal processes, then they may be an employee or worker, regardless of what the contract says. It is important for tech companies to consider these issues and to seek advice if they are unsure of the status of a particular individual they are proposing to hire or engage.

Build scalable policies early

Startups often operate informally, but as headcount grows, so does the need for structure. Employment tribunals expect companies to have clear policies on matters such as discipline and grievance, health and safety, data protection and equality.

Investing in an HR infrastructure is therefore highly valuable. This can include:

• Putting in place staff handbooks with clear policies, for example on conduct, performance, and grievance.
• Having structured probation periods with defined expectations and review processes to ensure the right individuals are hired.
• Having clear remote and hybrid working policies that address health and safety, monitoring, and data security risks and set out the employer’s expectations in this regard.
• DEI (Diversity, Equity & Inclusion) policies to mitigate discrimination risks and providing training to all staff on such matters.  In particular, employers in the UK have a legal duty to take reasonable steps to prevent sexual harassment of their workers.  This is regardless of their size or sector.  Carrying out a risk assessment and providing training are some of the key steps employers are expected to take in this regard.

These frameworks not only ensure legal compliance but also support a positive culture and consistency across the company as it grows.

International remote work adds legal complexity

Remote and hybrid models are now standard in many industries, however, they are not without complications. Hiring someone in another country or permitting staff to work from abroad, for example, may trigger requirements under local employment laws, tax obligations, data protection rules and issues under local immigration law.

Before hiring internationally, it is important to:

• Consider using a PEO (Professional Employer Organisation) or Employer of Record.  These structures are effectively a service that provides outsourced HR functions like payroll, benefits administration and compliance for a client company.  The PEO / Employer of Record becomes the official "employer of record" of the employee for administrative and legal purposes.
• Review local employment, tax, immigration and other relevant laws.
• Ensure employment contracts reflect jurisdictional differences.

Ultimately, cross-border remote working models must include cross-jurisdictional and cross-practice considerations to avoid exposure to unnecessary risks.

Managing risk during growth

As headcount increases, so does the risk of disputes. Poorly handled terminations can lead to claims for unfair dismissal, discrimination, whistleblowing or breach of contract. This is particularly important given the reforms under the Employment Rights Bill which will make protection from unfair dismissal a day-one right.

It is important to develop and put in place measures and procedures to monitor staff performance and to tackle any issues at an early stage, consistently and in line with relevant policies. Similarly, having a clear disciplinary procedure would also mean expected standards of behaviour are clearly set out, so that any disciplinary action following particular behaviour does not come as a surprise. 

Growing businesses should particularly be aware that that employment tribunals have higher expectations of larger employers due to their having greater resources.

Employment law considerations will also emerge as and when the business acquires, is sold to or merges with other businesses. Employment due diligence is an important aspect of corporate transactions, particularly those involving the sale of a business which may fall within the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). 

The key aspect of TUPE is the automatic transfer principle, under which employees assigned to the transferred business automatically move to the new employer with their existing terms and conditions of employment. The buyer in that situation inherits all employment-related liabilities connected to the transferring employees and any dismissal due solely to the transfer is likely to be automatically unfair unless justified by an economic, technical, or organisational reason entailing changes to the workforce changes. Both the seller and buyer would also have obligations to inform and, in some cases, consult with employee representatives about the sale and failure to comply with those can lead to claims in the employment tribunal, with potential awards of up to 13 weeks' pay per affected employee. 

TUPE implications can therefore significantly affect the transaction's timing, cost, and structure, requiring careful due diligence and negotiation of indemnities to allocate employment liabilities between the parties. 

Preparing for scale – legal trends to watch

Tech companies must stay ahead of evolving legal landscapes. Looking ahead, key themes from an employment law perspective include:

• Proposed reforms to employment rights: including day-one entitlements, stricter regulation of zero-hours contracts, changes to the statutory flexible working request regime, strengthening of the duty of employers to take steps to prevent sexual harassment at work and introducing protection from third party harassment (i.e. making employers potentially liable in the event that their workers are subjected to harassment by customers or clients).
• AI and algorithmic management: legal risks around bias, transparency and consultation. Automated decision-making in an employment context is subject to specific rules under the UK GDPR and the Data Protection Act 2018 and employees have the right not to be subject to decisions based solely on automated processing. 
• Workforce diversity and inclusion: legal obligations under the Equality Act 2010 and the reputational impact of falling short in this regard.
• The growing importance of workplace culture in staff retention, and an increased willingness on the part of employees to bring complaints and claims.

Conclusion

Employment law is not just about avoiding risk; it includes building a foundation for sustainable growth. By investing in strong contracts, clear policies, and being proactive in seeking legal advice, tech companies can scale confidently while protecting their people and their business.

Whether you are still in the garage or approaching unicorn status, employment law should be part of your growth story.

Please contact the Employment team to discuss your employment growth strategy and a budget for your employment documentation.